Over the past four years, the US Federal Reserve has reduced the surplus central bank reserves that it had built up under its quantitative easing programme. Over the same period, the Basel 3 banking regulations have, however, significantly increased banks’ demand for central bank liquidity. Before Basel 3, all reserves in excess of “required reserves”, in the monetary policy sense of the term, were, justifiably, treated as excess reserves. Since the new liquidity rules have come into force, only those reserves in excess of the regulatory constraint may be so treated. Although US banks have so far limited the initial effects of the reduction in reserves on their liquidity ratios, notably at the cost of increased dependence on the Federal Home Loan Banks, it would appear that the first signs of tension in liquidity are beginning to show.

The adoption of IFRS 9 on 1 January 2018 has changed the impairment model for financial assets, which is now based on the recognition of expected credit losses.
A more granular analysis of the quality of performing assets, specifically the introduction of an intermediate category, has resulted in significant additional provisioning, curtailing bank equity. Given the already high level of provisions and the mediocre quality of their lending books (although this has since improved), the cost of transition to IFRS 9 raised further questions for southern European banks. Our analysis shows that the costs can be covered, but that they will be proportionately higher for Italian banks than for their Spanish and Portuguese peers. Such differentials suggest that a discrepancy exists between the processes of cleaning up of bank balance sheets.

The adoption of IFRS 9 on 1 January 2018 has changed the impairment model for financial assets, which is now based on the recognition of expected credit losses.
A more granular analysis of the quality of performing assets, specifically the introduction of an intermediate category, has resulted in significant additional provisioning, curtailing bank equity. Given the already high level of provisions and the mediocre quality of their lending books (although this has since improved), the cost of transition to IFRS 9 raised further questions for southern European banks. Our analysis shows that the costs can be covered, but that they will be proportionately higher for Italian banks than for their Spanish and Portuguese peers. Such differentials suggest that a discrepancy exists between the processes of cleaning up of bank balance sheets.

On the Same Theme

Next European Parliament projection
1/9/2019

The European parliamentary elections in May 2019 will mark the start of a major process of renewal for European institutions. After Brexit, the European parliament will have only 705 seats, from 751 at present.
Aggregating national polls can help produce projections for the make-up of the new parliament, although naturally these need to be treated with some caution. According to current projection by Poll of Polls, a weakening position for the dominant conservative and social-democrat groupings may be on a sufficient scale to prevent the PPE and S&D alliances from taking a majority in the European parliament. The liberal/centrist ALDE group, if its rising poll numbers feed through into the ballot boxes, hopes therefore to become a supportive force able to forge compromises. Under the current projections, groups housing members from Eurosceptic, sovereigntists and nationalist parties will see a bump in their numbers, increasing their influence. Thus, the nationalist ENF group, which includes in particular members from the Italian Lega and the French RN (formerly Front National), will be neck and neck with the European Conservatives and Reformists (PiS, Debout la France, N-VA, etc.). However, they will still fall far short of a majority.

The solvency of European Union banks continues to improve
12/31/2018

The European Union's major banks have continued to strengthen their solvency. They have improved their ability to absorb a large-scale financial shock and to resist its economic consequences on their own.
The CET1 ratios of the EU's major banks are higher than they were during the EBA's previous stress tests, both at the starting and end points of the shock, even though the shock itself was more severe.
There were significant discrepancies between the results of the various banks. The results highlighted the banks' differing sensitivity to the adverse scenario, related in particular to their business mix and/or their international exposure.
The results will be incorporated in the SREPproce ss and will contribute to determine in part the amount of additional capital certain banks might have to build up.

Risk sharing in the eurozone: which way forward?
10/30/2018

The debate on risk sharing in the eurozone has intensified significantly in recent years. It is an acknowledgment that the eurozone “house” needs to be made more solid but also reflects the concern about limited policy leeway to address future economic downturns. Risk sharing can be public or private sector based and, within each channel, either domestic or cross-border. Public cross-border risk sharing will have an important role to play in strengthening the functioning of the eurozone. However, the challenge is considerable because it raises questions of pre-commitment, conditionality, moral hazard and governance. Finally, risk sharing needs to be considered together with risk prevention, risk management and boosting resilience.

With Brexit, the UK loses not one but nine European passports
10/17/2018

The European financial services passport can be divided into nine passports differentiated by type of financial activity. Each passport grants specific rights to the holders, who generally accumulate several passports to cover their customers’ needs. These passports allow the freedom to provide financial services within the European Economic Area (EEA) and to set up branches (and not necessarily locally-licensed subsidiaries).
In 2016, 13,500 companies in the EEA benefited from at least one passport. Although the number of passports per activity provides an indication of the potentially numerous legal obstacles to pursuing cross-border activities, it does not say much about the scope or type of financial flows, nor the number of jobs affected by the loss of the European passport. With Brexit, the UK will become a third country. It will have to comply with equivalence regimes, which are granted (or not) by the authorities of each host country for a definite or indefinite period of time.

Europe: The importance of tourism as source of foreign revenues
7/25/2018

The tourism sector directly generates more than 5% of the European Union GDP. The contribution is highest in Spain (11%), Portugal (9%), France (7%) and Italy (6%). The sector employs about 12 million people, or almost one in 10 jobs in the non-financial business sector. In particular, the sector has a high share of female and young workers.
In 2016, expenditure by international visitors in the EU on food and drink, accommodation and entertainment amounted to EUR 342 bn, which is about 31% of total international tourist earnings. However, as EU residents also spent on these items mostly in other EU countries, the net travel services in the EU balance of payments amounted to only EUR 26 bn. For some European countries, inbound tourism is an important source of earnings for their local economies. This is especially the case for some smaller countries around the Mediterranean such as Croatia, Malta and Cyprus. By contrast, northern and western European countries have recorded deficits on their travel trade balance.

The common minimum coverage levels proposed by the European Commission and the supervisory expectations of the ECB for prudential provisioning could force certain EU banks to sell off their non-performing exposures. The less favourable the terms of disposal for the banks, the greater will be the losses accounted, over and above provisions.
The ongoing cleaning up of the balance sheets of certain banks must continue, but achieving this should not come at the cost of a further deterioration of their situation.

The ECB announces QE end
6/15/2018

The ECB announced the end of QE but lenghtened the horizon of the first rate hike.

The project to remove non-performing loans from the banking system
6/12/2018

The European Commission presented a package of measures designed to reduce the outstanding amount of non-performing loans and to prevent their future accumulation on the balance sheets of member states’ banks.
These measures aim notably at facilitating the recovery of the value of loans secured by collateral and at developing secondary markets for non-performing loans. Minimum coverage levels would be imposed on banks for new loans that would become non-performing. The package also provides a technical blueprint for setting up national Asset Management Companies (AMCs), in full compliance with new prudential regulation and new EU rules on state aid.
The ECB implements prudential provisioning expectations within the framework of pillar 2 of the Capital Requirements Directive (CRD).
These measures and supervisory expectations could force European banks to account more losses. It could put banks in the de facto position of having to sell off their non-performing loans at prices below net book value. The impact could be even more important for banks that would already face adverse conditions. Moreover, the assets removed from bank balance sheets would be simply transferred to another sector that is subject neither to the same prudential regulation nor to banking supervision. Although some banks need to continue the cleaning up of their balance sheets, this objective must not be achieved to the detriment of the EU banking sector as a whole.

Europe, should we be concerned about the recent economic slowdown?
5/25/2018

Europe has seen activity levels slow since the beginning of the year, with economic indicators dipping somewhat. Although the recovery still stands a chance, the atmosphere around it is clearly coming under greater strain.

European Union: Non-performing exposures down by a third in three years
5/9/2018

Non-performing exposures in the banking sector of the European Union as a whole declined for the 11th consecutive quarter, dropping from EUR 1,119 bn in Q1 2015 to EUR 805 bn in Q4 2017. This decline of about a third is notably attributable to the resumption of stronger growth and to the banks’ active management of non-performing exposures outstanding. The environment was also favourable for granting new loans. The resulting increase in the loan outstanding amount helped bring down the ratio of non-performing exposures from 5.3% to 3.6% over the period.
With the exception of Greece, the countries with the highest ratios of non-performing exposures reported the sharpest declines of the latter.

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